When Yang Zhongjun and his brother set up shop on Furniture Avenue five years ago, it seemed like a business plan that could not miss. China had just passed Italy as the world’s top producer of new furniture and the centre of that industry was the factory-lined 10-lane avenue in Dongguan where the Yang brothers had secured space for a small, drawer-slide plant and outlet store.

A China Central Television (CCTV) helicopter flies over the Chinese national flag in Tiananmen Square October 9, 2012.
Reuters

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But what Mr. Yang didn’t know was that government planners, even then, worried about where manufacturing hubs like Dongguan were headed. Coastal Guangdong province was too reliant on low-end manufacturing and could end up stuck with the factories – and social problems such as high crime. Dongguan could become China’s Flint, Mich.

Since then, demand for Chinese exports has fallen off sharply. Labour costs and the yuan, China’s currency, are rising. In very short order, Dongguan has lost its old economic advantages. And surprisingly, the local Communist Party boss is all in favour of that.

When Mr. Yang arrived, Dongguan was a swelling city that attracted entrepreneurs and migrant workers so rapidly that no one knew how many people lived there beyond its official eight million souls. It proudly embraced the nickname “the factory floor of the world” and produced an astonishing share of the world’s shoes, toys and computer parts, as well as furniture.

Today, specialists at the Guangdong Academy of Social Sciences, which advises local Communist Party secretary Wang Yang, want to let the old-industry factories go and lure high-tech, higher-salary ones to take their place.

“Without this painful transformation, Guangdong’s competitive advantages will be gone and we will be at a dead end,” said senior researcher Li Youhuan in the provincial capital of Guangzhou.

Planners have had some early success, persuading a pair of corporate giants to set up research and development centres. But for now, the bad outweighs the good.

There are moments when you can jaywalk with confidence across Furniture Avenue. The storefronts to the left and right of Mr. Yang’s Huikai Hardware are empty and construction appears to have stopped on a six-floor building across the street, where a red banner pleads for tenants.

“When I first came here five years ago, it was really prosperous and cheerful. But since 2008, it started declining,” said the 26-year-old Mr. Yang.

Part of the hollowing out is by government design. When Mr. Li first proposed the dramatic shift a decade ago, he said, his peers ridiculed him. It was a time of 20-per-cent annual growth in the province. The good times would never end.

But in 2007, Guangdong got a new Communist Party boss, the reform-minded Mr. Wang. Mr. Li said Mr. Wang pushed his idea forward, despite opposition from the factory bosses and his rivals within the Communist Party.

They called their economic plan “double transformation” – letting the old industries go while trying to attract higher-value companies and jobs. Dongguan needed the shock therapy version of it.

Over the decades, three-quarters of its residents have come from somewhere else – and it became so overcrowded that public infrastructure couldn’t keep up. Truck-carrying superhighways were built, but few sidewalks. Getting off or on one of the city’s buses required the skills of a salmon.

The mix of poorly paid labourers crammed together in Dongguan proved combustible. The city became famous in China for its high crime rate and residents sometimes appeared callous, as in a 2011 case that saw a bloodied rape victim crawl into the middle of a street hoping for help, only to be ignored by passing motorists.

The minority who were actually born and raised in Dongguan speak nervously of the security situation. “Crime is worse here than in other cities because there are so many people from other provinces. I’ve seen a lot of people get their bags snatched by thieves on motorbikes. The hotels are full of prostitutes,” said Zhang Shiming, a 27-year-old taxi driver. “My wife got robbed in the street near our house, and now she’s afraid to go to the market.”

Mr. Li said the crime rate will drop if the government can change the mix of people who work and live here. The key, he said, is for planners to embrace the truth that increasing labour costs and the rising value of the yuan mean China will lose its status – to Cambodia, Vietnam and India – as the cheapest place of production. Upwards of one-fifth of the factories here have closed down or moved elsewhere. An uncounted number of others have stayed open, but with reduced working hours and pared-back production lines.

The local economy, which in 2006 and 2007 led the country by posting annual growth near 20 per cent, sputtered to 2.5 per cent expansion in the last quarter of this year.

But there are already signs of a revival. In recent months, a division of China’s flagship Huawei Technologies Co. Ltd. agreed to buy land for a research and design centre in Dongguan, and Walt Disney Co. plans to establish a base for designing and manufacturing spinoff merchandise from its film franchises. Those are precisely the kind of companies Mr. Li envisions taking over emerging empty spots in Dongguan’s factory belt. (He says the companies were offered no special incentives to choose Dongguan.)

Local residents say they understand what the government is trying to do, but admit they’re starting to get nervous as their boomtown begins to show signs of a prolonged bust. “I think importing new and high-tech industries will eventually be good for the local economy. The question is how long it will take,” said the owner of a local tea store that had only empty tables on a Thursday afternoon. “Right now, it’s hurting us a lot.”